Guide to smart banking: Why P2P lending is an ‘interest’ing idea

Rajat Gandhi | Updated on February 25, 2018

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Millennials are riding a new investment channel to create wealth. Here’s how it works…

Until a few years ago, the career path for most Indians followed an almost fixed trajectory: securing a stable job, getting married by their mid-20s, planning for retirement in their 40s, and then, well, retiring at 60. As far as planning for investments was considered, these individuals seldom looked beyond parking their money in either long-term bank/post office deposits or gold, while those with deeper pockets and greater risk appetites would usually invest in real estate assets orhigh-value stocks for higher returns.

Subsequently, the internet age and the information boom in the early-to mid-2000s drove greater awareness about instruments like mutual funds and SIPs, leading to an increasing number of professionals from urban areas seriously considering these investment instruments. Today, with the rapid progress and proliferation of digital technologies, a whole new segment of consumers has emerged, which is leading the alternative finance and investment revolution in India with its choice of new and unconventional investment opportunities.

With more young people between the ages of 20 and 35 years entering the workforce each year, the consumption of banking and financial services is expected to see a sharp rise, as more millennials will seek profitable investment avenues to plan and start saving for major future expenditures like buying a home for themselves.

Enter P2P lending

A highly technology-savvy consumer segment, millennials are armed with the latest smartphones and 24x7 internet connectivity, and hence, are usually far more inclined, as opposed to their parents, towards consuming services that are delivered online.

When it comes to investing their money, millennials leverage all the information on financial and investment products at their disposal to take informed decisions for their investments. These young investors value features like flexibility, liquidity, digital support, and paperless processing when choosing their investments. They are also far less averse to risk as compared to their parents’ generation and, thus, more open to innovative investment options.

That’s where online P2P (peer-to-peer) lending steps in, offering a significant edge over traditional methods of investment to this discerning investor community.

The scale of potential returns is significantly higher when investing in P2P loans than from traditional investments. Banks, through savings accounts or fixed deposits, provide interest rates of around 6-8 per cent, mutual funds/SIPs come with a lock-in period and returns of around 10-15 per cent, and stocks are highly volatile and require investors to be constantly vigilant of market fluctuations.

P2P lending, on the other hand, is a completely tech-driven investment, which gives a net annualised return of 18-22 per cent to lenders, who start earning their principal and interest back from the very first month. The returns are higher because you can lend directly to the borrower and the intermediary costs are drastically reduced.

With the lure of massive annual returns, flexibility, and simple, tech-enabled processes, consumers as young as 20 years old from across various geographies are taking to P2P lending platforms to invest their money and start planning their finances for the future. A majority of investors on these platforms are salaried professionals aged between 20 and 35 years looking for additional sources of income.

On the other hand, young investors from traditional money-lending backgrounds are also exploring P2P lending because of its technology-centricity and highly structured modelling, which offers more secure and flexible ways of lending as compared to past practices.

What also favours P2P lending is the ease with which investors can start and build portfolios. Signing up on P2P lending platforms takes a few clicks and some basic KYC documents. Lenders start by building their own portfolios and investing in multiple borrowers and earn gross returns that are anywhere between 18 per cent and 26 per cent annually. What’s more, they can monitor, manage, and reinvest their loans in real time, giving them total control over their portfolio. All processes are simple, tech-enabled and online.

Building a diverse portfolio is the key to risk-mitigation. The idea is to invest smaller amount across many borrowers listed under various yield and risk categories like low, medium, high, and very high. This is similar to building a diverse portfolio of stocks from blue-chip to low-cap. However, in P2P lending it is far easier and faster.

On Faircent.com lenders can invest as low as ₹750 per loan size or choose tech-enabled processes like auto-invest to save time. These features are a major attraction for millennials and, in fact, according to the last Research and Analytics report on P2P lending published by Faircent.com, 64 per cent of lenders are below 35 years of age.

The unprecedented convergence of new technologies, proliferation of smartphones, and a rising number of people getting online is driving tremendous changes in the financial services landscape, and investments, in particular.

Although alternative investments or asset classes like P2P lending may still be at a nascent stage, their potential to grow is immense, considering how the millennial generation is pushing these services to the forefront of its financial agenda. With P2P lending now being regulated by the RBI, the traction for this highly innovative and secure asset class is expected to see a massive rise in the near future.

The writer is founder of Faircent, an online P2P lending marketplace

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Published on February 25, 2018
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